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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1013066166331

Date of advice: 9 August 2016

Ruling

Subject: Deductions - other - guarantor payments

Question 1

Are you, in your capacity as a guarantor, entitled to a deduction for the repayment of Company X works debt?

Answer

No.

Question 2

Are you entitled to a capital loss in relation to the repayment of Company X debt?

Answer

Yes

This ruling applies for the following period(s)

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are a director and guarantor of a company.

This company ceased business and was liquidated.

You as a guarantor of this company were responsible for repaying the debt the company.

You have sold your own home to repay the debts of varies suppliers.

The debt is almost fully paid off.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

Deductibility of payments as guarantor

Section 8-1 of the Income Tax Assessment Act 1997 ( ITAA 1997) allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

Taxation Ruling TR 96/23 discusses the deductibility of payments made under guarantee. The ruling states that liabilities arising under contracts of guarantee will not be deductible under section 8-1 of the ITAA 1997 if the provision of guarantees is not a regular and normal incident of the taxpayer's income earning activities. The ruling further states that if payments under the guarantee are not deductible under section 8-1 of the ITAA 1997, any payments made under the guarantee, are capital in nature.

In your case, you were a guarantor for a company to repay the debt owed to suppliers, when the company went into liquidation. The purpose of the payments was not to directly produce your assessable income but to fulfil your commitment as a guarantor.

As you are not in the business of providing guarantees and the purpose of the action was not to produce any assessable income for yourself, you are not entitled to claim a deduction for these expenses under section 8-1 of the ITAA 1997.

Guarantor payments - capital gains tax provisions

Under section 102-20 of ITAA 1997 you make a capital gain or loss as a result of a capital gains tax (CGT) event.

CGT events are the different types of transactions or events involving a CGT asset.

A CGT asset is:

A debt owed to you is a CGT asset as it is a legal or equitable right that is not property.

When a guarantor repays a debt under guarantee to a primary creditor (such as a financial institution), the guarantor acquires a CGT asset, namely, the debt owed to the guarantor by the debtor (such as a company). If the debtor (company) cannot repay the debt, the guarantor will make a capital loss under section 104-25 of the ITAA 1997 (CGT event C2) due to the cancellation of the debt in the event of the company being wound up.

The time of a CGT event C2 in relation to a debt owed to you will occur when you enter into the contract that results in the asset ending (for example, a settlement deed) or, if there is no contract, when the asset ends (for example, when it becomes irrecoverable at law).

As Company X has been wound up, it cannot be said that the company will pay the outstanding debt to you. As the debt is irrecoverable, it is considered that a CGT C2 event has occurred for you. Therefore you are entitled to a capital loss.

Please note that a capital loss can only be used to reduce a capital gain in the same year or if there are no capital gains in that year, they may be used in a future year.

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